Get Ready For The Trump Slump With These Defensive ETFs

From Zacks: The latest streak of gains in the key U.S. indices was as surprising as Trump’s win in the U.S. election. Since Trump’s election win in early November, the S&P 500-based ETF (SPY – Free Report) has added about 6.1%, the Dow Jones Industrial Average-based (DIA – Free Report) has generated about 8.7% while the small-cap representative Russell 2000-based (IWM – Free Report) has advanced about 14.7% (as of January 12, 2017).

But the market may have had enough of “Trump Bump”. It now seems that the outstanding U.S. stock rally that started with Trump’s win might finally succumb to a slowdown on overvaluation concerns or change its focus from Trump or corporate earnings.

Donald Trump’s first press conference on January 11 since last July baffled some investors. Many were disappointed about the lack of clarity on the proposed $1 trillion infrastructure spending and corporate tax reforms. Rather, Trump attacked big pharmaceutical companies on the price gouging issue, admitted to Russia’s involvement in U.S. election hacking and conflicts of interest in his business plan (read: Trump’s First Press Conference Puts These ETFs in Focus).

As a result, most key U.S. equity ETFs stepped back on January 12 with SPY and DIA shedding about 0.3% each and Nasdaq-100 based (QQQ – Free Report)losing about 0.2%. Small-cap ETF IWM too lost about 0.8%and U.S. dollar ETF PowerShares DB US Dollar Bullish ETF (UUP – Free Report) retreated about 0.4% on Thursday. Lack of detailing on fiscal reflation induced a risk-off sentiment in the market.

Against such a backdrop, Goldman Sachs indicated extremely high valuation of the S&P. So, all in all, two things can happen next. Either lack of information regarding fiscal boost can wane the Trump rally, and in fact cause a correction in the market, or performance of corporate earnings will take over Trump bump/slump completely and set the mood of the market ahead. After all, much of the Trump-promise is priced in at the current level. So, further room for a Trump bump is limited.

Given this, we highlight a few ETF options that are relatively safe and can help investors in the upcoming trading sessions fraught with Trump and earnings risks.

We believe small caps – which mainly have domestic focus – have seen enough of a bull stretch post Trump, calling for high valuation. On the other hand, large caps have wider foreign exposure and can also go out of investors’ favor due to a stronger greenback (read: Bet on the Rising Dollar with These ETFs).